Question

A collateralized bond is always safer than a debenture bond.

True

False

A callable bond is superior to a non-callable bond because it is safer.

True

False

Answer 1

1. True - Collateralized bonds are safer than debentures. They are generally issued by the government/ government agencies and are hence more safer. They are backed by collateral, and hence the money invested by investors are safe. Bonds are ofter rated by credit rating agenceis.

Debentures on the other hand are unsecured and are generally issued by corporates to raise funds. They are not as safe as bonds because they are not backed by any asset (collateral).

2. False - Callable bonds are not superior to a non-callable bond. Callable bonds are riskier to an investor than a non callable bond.

Eg. Let us assume a case where company A issues 10 year callable bonds on 1 January 2000 and company B issues 10 year non callable bonds on the same date. Both bonds carry 7% interest rate p.a. After 10 years, if the interest rate goes down to 6%, company A shall pay 6% whereas company B shall still pay 7% interest. So for an investor, non callable bonds are more safe compared to a callable bond